Analysis of 2007 Deloitte Annual Review of Football Finance

02/06/2007

ITS LOOKING GOOD OUTSIDE THE PREMIERSHIP

'The outlook outside the Premier League is now significantly brighter', writes top football analyst Dan Jones in the foreword to the latest Deloitte Annual Review of Football Finance. 'The Football League has returned to its long term revenue growth path, and 2006/07 was the first year of a new and significantly improved broadcasting deal, providing further opportunities for growth. The simplistic view of the "poor getting poorer" in the Football League while the Premier League alone thrives is clearly wide of the mark.' Nevertheless, the report shows that the gap between the average Premier League and Championship club's revenue was a record £56m in 2005/6 and is likely to increase to over £70m in 2007/08. Even the lowest Premier League club revenue figure is expected to increase to around £45-£50m in 2007/08 (from £35m in 2005/06).

Championship clubs' revenues grew by about 4 per cent to reach a new high of £318m in 2005/6, an average of £13m per club (although this is the same as the anticipated profit figure for the average Premiership club in 2007/08). League 1 clubs' revenues topped £100m for the first time since 2001/02, up £6m to £102m, whilst League 2 clubs' revenues also increased, up £3m to £61m. Operating losses in the Championship increased from £42m to £53m in 2005/06, an average of just over £2m per club. Losses in Leagues 1 and 2 (£15m and £5m respectively) also increased slightly. Championship clubs' pre-tax losses improved from £65m to £47m and three of the overall top ten clubs ranked by pre-tax profits were Championship clubs in 2005/06 (Cardiff City, Leicester City and Norwich City). Championship clubs' total wage costs for 2005/6 increased by 5 per cent to £228m with the overall wages/turnover ratio remaining relatively stable at 72 per cent (but higher than in the Premiership). Four clubs had a wages/turnover ratio of over 100 per cent, although two of these cases (Watford and Sheffield United) reflected promotion bonuses. There continues to be significantly less correlation between final wage costs and final league position in the Championship than in the Premiership.

The sums of money redistributed to Football League clubs from the Premiership reached £48m in 2005/6, against £28m the previous year, the highest level since the Premier League began. Attendances in the Championship grew to over 10 million in 2006/7, the first time the 10 million barrier has been broken since 1951/52. Half of the Championship clubs had average attendances over 20,000. The Championship clubs' aggregate net debt at the end of the 2005/6 season was around £300m. At least eleven clubs had net debt of more than £10m. The report warns, 'the prospect of a club significantly reducing that net debt in the short/medium term is dependent on either promotion to the Premiership or an injection of equity funding from a new souurce.' Below the top two divisions, managing the clubs' financial position remains a challenge from one season to the next. While there has been a general improvement in the financial position, legacy debt issues relating to past seasons remain at several lower division clubs.

TAKEOVERS ARE GOOD NEWS

The spate of takeovers of football clubs taking place at the moment is good news. This is the message of leading football analyst Dan Jones in his foreword to the latest Deloitte Annual Review of Football Finance. He comments, 'The wave of new owners are successful businessmen in their own right, often bringing past experience of operating large sports organisations to their new clubs. Importantly, they are also likely to be more business focussed in their approach to managing their clubs than may have been the case in the past. The fact that a number of new owners are arriving at broadly the same time is important. A collective impetus to change rather than being a lone voice could, we believe, herald a step change in the financial performance of Premier League clubs. As we have stated for many years, cost control is the key to delivering successful and profitable football clubs. Even if the Premier League were only able to maintain its current wages to turnover ratio of 62 per cent in 2007/8, operating profits may be around £260m, over £100m over their present level and an average of about £13m a club. Furthermore, every percentage point reduction in the wages to turnover ratio could deliver additional operating profitability of £17-£18m.'

THE CALM BEFORE THE STORM

In some ways football is experiencing the calm before the storm, with some changes in club ownership, and the new Premier League broadcasting deal having the potential to deliver real and far reaching impacts in the short term, argues Dan Jones of Deloitte Sport Business Group in the foreword to the latest Annual Review of Football Finance released this week. 'Premier League clubs will get a significant boost to revenues as a result of the new broadcasting deals from 2007/08 which firmly cement the Premier League's status as the world's most popular sports league.' However, Jones reproduces a warning from the 2000 Annual Review about money trickling quickly through the fingers of clubs to the player and their agents and overseas clubs in transfer fees. He notes, 'Subsequent editions of the Annual Review reported that player wages had consumed most of the increase in revenue with no improvement in profit margins. Will things turn out differently this time?' The experienced analyst is confident that they will: 'There does currently seem to be a different feel about the industry. Many more Premier League clubs have to deliver profitability, to ensure that the club's business model works by servicing loan finance requirements or delivering real investment returns to new owners.'

The league clubs as a whole saw revenues increase by 4 per cent to £1,860m in 2005/06 with revenue increases in all three divisions. Total player costs for the league clubs exceeded £1 billion for the first time. Overall gross player wages were up 5 per cent to £806m. Overseas clubs continued to be financial beneficiaries of the Premiership's success. Net transfer fees leaving the English game were £187m. Fees to agents from Premiership and Football League clubs in 2005/6 were estimated to be over £50m.

PREMIERSHIP FORGES AHEAD

A regular staple of the media is a story that the Premiership bubble has burst. A very different picture is painted in the latest authoritative Annual Review of Football published by Deloitte Sport. Both Premier League clubs' average attendance (34,360) and capacity utilisation (93 per cent) for the 2006/7 season are up on the previous year. Twelve clubs in the Premier League operated at a utilisation of 96 per cent or above. A measure of the financial progress made is that in 1991/92, the last year before the formation of the Premier League, the total revenue of then Division One clubs was £170m. In 2005/6 the turnover of just one Premier League club - Manchester United - is of a similar magnitude at £168m. Looking forward, English Premier League revenues are set to exceed €2.5 billion in 2007/8, the first year of new broadcasting deals which is likely to be €1 billion above the next highest earning league. This is a phenomenal contrast with Italy given the two leagues' revenues were almost equal at the turn of the millennium.

Premiership clubs' total wage costs for 2005/6 increased by 9 per cent to £854m. This contrasts with the situation in 2004/5 when the clubs' total wage costs reduced (by 3 per cent) for the first time in the history of the Premier League. The wages/turnover level increased to 62 per cent in 2005/6. There continue to be five English clubs incurring total wage costs each season greater than £50m. First come Chelsea (£115m), then Manchester United (£85m) with Arsenal (£83m) narrowing the gap compared to 2004/5. There is a substantial gap between the next two clubs - Liverpool (£69m) and Newcastle United (£52m) - and Spurs at £41m. Five Premiership clubs managed to reduce their wages costs in 2005/6 with the biggest decreases at Fulham and Manchester City. However, this was outweighed by increases amongs the top five players and spending sprees at Spurs, Charlton and Aston Villa.

Premier League clubs revenues increased by 3 per cent to set another European record at £1,379m, an average of £69m per club. The average revenue of the 'big four' Premier League clubs was £144m, almost three times the £50m average for the other sixteen clubs in the top flight. Deloitte Sport project that Premier League clubs' revenues will exceed £1.4 billion for the first time in 2006/7 and are projected to rise to £1.765m in 2007/8 as the new broadcasting deal kicks in. Operating profits in the Premiership fell for the first time since 1999/000 to £138m (down 15 per cent). The number of clubs reporting operating losses increased from two to four (Aston Villa, Charlton, Chelsea and Fulham). The number of Premiership clubs that reported pre-tax profits fell from 14 in 2004/5 to nine in 2005/6. Chelsea's pre-tax losses improved from £140m to £80m in 2005/6. Roman Abramovich had bankrolled Chelsea to the tune of a cool £485m of new money by the end of the 2005/6 season.

Record Revenues in European Football - 2/6/07

The European football market grew to €12.6 billion in 2005, a €1 billion increase on the previous year according to the latest Annual Review of Football Finance released by Deloitte Sport Business Group. The revenue growth of the big five European leagues, which account for 53 per cent of the market, and the impact of the 2006 World Cup were the major drivers of this growth. Combined revenues of the 'big five' European leagues totalled €6.7 billion in 2005/6, a 7 per cent incrrease on the previous season. Whilst the English Premier League continues to generate the greatest revnues, which at €2 billion in 2005/6 were almost €600m above the next highest earner, the French Ligue 1 showed the largest absolute and relative growth in 2005/06 with an increase of 31 per cent (€214m) driving revenues to €910m. Although revenues in Italy's Serie A grew in 2005/06, the problems affecting Italian football are having a detrimental impact on many revenue streams, in particular matchday, leading to what Deloitte describe as an unhealthy reliance on broadcasting income. When they report on the 2006/7 season, they predict that Serie A will lose its status as the second highest earning league.

Four of the big five European leagues had increased wage costs in 2005/06, with the Spanish Primera Liga and French Ligue 1 showing double digit growth, whilst the Italian Serie A decreased wage costs for the fourth successive season. The English Premiership (€200m) and Germany's Bundesliga (€72m) were joined by the French Ligue 1 (€37m) in recording operating profits in 2005/06. This is the first time that the French Ligue 1 has achieved a profit since 1999/2000. Deloitte see it as a testament to the sensible management of French football's new stream of television income. UEFA Champions League revenues generated from centrally negotiated broadcasting and sponsorship deals totalled €610m in 2005/06. €437m was distributed to the 32 clubs participating in the group phase, over seventeen times the level distributed to clubs in 1992/93, the competition's inaugural season.